The lawsuit represents Tenet’s latest effort to scupper a potential deal with CHS, which operates 130 hospitals in the US and had $13bn in revenues last year.
Tenet claims in the suit that CHS made between $280m and $377m through improperly admitting Medicare patients between 2006 and 2007.
It estimates that the liability and damages for these practices could exceed $1bn because many of these patients could have been placed under observation, or short-term, outpatient monitoring.
CHS called the allegations “baseless” and accused Tenet of using a “scorched earth” defence without regard for the interests of its shareholders.
“The bottom line is that these self-serving allegations are an attempt by Tenet’s management and board to continue their entrenchment strategy and to distract Tenet shareholders from CHS’s pending offer,” the company said.
The lawsuit comes after CHS made a $3.3bn hostile bid for Tenet last December, offering to pay $6 a share, including $5 cash for Tenet – a 40 per cent premium. It rebuffed the offer as too low, adopted a poison pill and delayed its annual shareholder meeting.
Tenet said it uncovered the irregularities as it was carrying out due diligence on CHS. It pointed to research that it commissioned from Avalere Health, a consultancy, that showed CHS placing half as many patients under observation than hospitals in the same markets.
CHS disclosed in its 10-K filing with the Securities and Exchange Commission that the Office of Inspector General of the US Department of Health and Human Services had previously requested documents relating to its admission criteria and the attorney-general in Texas had requested information about its emergency department procedures and billing.
Tenet said that CHS had touted its ability to find synergies through acquisitions, such as its acquisition of Triad Hospitals in 2007.
It alleges that additional revenues were generated by cutting the use of observation at the hospitals it acquired by more than 50 per cent and admitting more patients to “needless hospital stays”.
“As a result of the revenues generated from these improper admissions, CHS’s stock price has for many years been artificially inflated,” the Tenet lawsuit said. “CHS now seeks to use its artificially inflated stock price to pay, in part, for the proposed acquisition of Tenet.”
Tenet said CHS’s alleged tactics meant that its stock was worth less than it stated when proposing the acquisition and that its ability to finance the cash portion of the deal could be hampered.
It argues CHS could also be excluded from Medicare for practices that overbilled the programme.
